With the Fed on a path to taper, rising bond yields could act as a razor's edge against the stock market, cutting into gains with every tick higher.
The minutes of the last Fed meeting show that the Fed on Aug. 1 was getting set to reduce, or taper, its bond buying by the end of the year, but with no clear signal of when it might move. The minutes, released at 2 p.m. ET Wednesday, triggered immediate selling in both bonds and stocks. The Dow swung to a triple digit loss, which it then totally reversed in a short-covering charged rally, before tumbling again to end with a 105 point loss at 14,897. The volatility is expected to continue.
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"I thought to be honest, (the minutes) were somewhat of a non-event," said Peter Boockvar, chief market analyst with the Lindsey Group. "I think while they didn't specifically mention anything about September, by not pulling back from the possibility of September, people are concluding it is September. But going through this I don't see anything new." The Fed has made it clear its pull back from the $85 billion in bond purchases would be dependent on the economy.
"It's a done deal. They're going to taper, unless things go south," said Barry Knapp, head of equity portfolio strategy at Barclays. "This leaned more hawkish."
Knapp said one hawkish note in the minutes was that the Fed committee members rejected the idea of lowering the 6.5 percent unemployment rate threshold it set for raising the Fed funds rate. Even though the Fed did not move up expectations for a short-term rate hike before 2015, Fed funds futures, in afternoon trading, reflected a higher market expectation of a rate hike in late 2014, he said.
Treasury yields meanwhile edged higher into the late afternoon with the 10-year at 2.89 percent, and by early evening, it was testing the 2.9 percent high it put in earlier in the week. Yields rose along the curve, with the 5-year yield moving rapidly higher to 1.64 percent. The belly of the curve is important for rates tied to business loans.
(Read more: US Treasury yields spike after Fed minutes)
Coming up: Jobless claims
Markets now turn their attention to economic data, particularly weekly jobless claims, released at 8:30 a.m. Thursday. The claims data will be especially important since it is from the same week that the survey is taken for the government's August employment report, to be released Sept. 6.
"If they stay in the 320,000 area, that really implies a stronger jobs number for this month," said Knapp. Claims are an important indicator for employment, a key metric in the Fed's calculus for easing.
"I think claims are a big deal. They really moved the market in the last few weeks," Knapp said. The jobless claims last week fell to 320,000, the lowest level in six years, and triggered a move higher in bond yields, which in turn helped drive a stock market selloff.
Other data Thursday includes manufacturing PMI at 8:58 a.m., FHFA home prices at 9 a.m. and leading indicators at 10 a.m. There is also PMI data expected for China and the euro zone.
The Fed minutes did strike one dovish note when they mentioned that a number of participants were somewhat less confident than they were in June about economic growth picking up in the near-term.
RBS senior Treasury strategist John Briggs said the market expected to hear an overall dovish message. "On the market, I think we probably came in on balance…with most people thinking given the rate rise, the tone of this thing was going to be dovish. I'm not saying they're hawkish . I just don't think they're saying anything new," he said.
"The minutes basically say 'remember what Bernanke said at the July press conference – that's still our message.' The tapering time line is the same," he said. The Fed has said it expected to begin tapering before the end of the year.
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The minutes also landed a day ahead of the annual Fed symposium in Jackson Hole, Wyo. Fed Chairman Ben Bernanke breaks with tradition this year and will not attend, but the symposium, starting Thursday evening, will certainly be filled with speculation about who will replace him in January.
"Jackson Hole could be interesting," said Knapp. "I think Jackson Hole is going to be a vigorous debate about the efficacy of asset purchases and the Fed will generally defend the impact on the U.S. economy,but there could be some very interesting work on the impact of emerging economies and foreign markets."
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Emerging markets have come under serious pressure, as U.S. rates rise and the Fed looks set to pull back from easing.
Briggs said he expects Treasury yields to continue to move higher and the bond market is trading anxiously. "I just think the market's vulnerable. It trades like it's vulnerable. We had emerging market woes, and it caused a one-day pop in the market. Now you've got stocks off late, causing no bounce. It tells you the market is long and vulnerable. I fear that the technical hedging that might need to occur if we continue to head north, especially if we go above 3 percent," he said, adding the 30-year is also aiming at the key 4 percent level.
"If we go above 3 percent, I think at that point, it might be an eye opener for the equity market. I think that would have a psychological impact on risk assets," he said. The selloff in stocks actually may curb some of the move higher in rates, he added.
Knapp said he expects rising rates to pressure stocks, and he expects the market to fall until the Fed starts tapering, which he expects in September. "The market's going down between now and then," he said. "By the beginning of October, we should likely be below 1600 (on the S&P)." The Fed meets Sept. 17 and 18.
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.